Some perspective on the loan origination business, from a veteran MLO
This June marks my fortieth year in the financial services industry. It is interesting, how much that we think has changed, remains the same (or perhaps, should be).
- The first company that I worked for, had an “internal” scoring system. We gave points to an application, based upon length of time on the job, length of time in the residence, type of job, payment history, our past experience with the customer, savings history and whether or not they were currently a homeowner. In order to even process the loan, we had to have a minimum credit score. If they did not meet the minimum credit score, we were encouraged to meet with the customer face to face, and explain to them what they could do to be approvable in the future.
- In 1974, we decided (finally) that it probably made good business sense to grant loans to individuals regardless of what their future “child bearing” plans were, and whether or not, the wife planned to continue employment.
- We tried to establish what was a stable monthly income, by averaging overtime and bonuses over two years.
- We allowed that issues could arise with credit; but, we wanted to determine if it was a recurring issue, or, a one-time problem that had been resolved.
- We calculated ratios and the borrower’s ability to pay, based upon the stable monthly income. We determined that it was a “high ratio” at 38%. If a borrower went over 40%, they would have to have very strong compensating factors, like high residual income, and strong savings pattern.
- In 1974, the minimum down payment was 3% on FHA, 5% on conventional. This remained the case until 2009, when it changed to 3.5% for FHA.
- The most popular mortgage instrument was a thirty year fixed rate loan.
- Loans with pre-payment penalties were non-existent.
- Since most loans were originated by local financial institutions, very few loans ever had “points” or origination fees. Basically, there was a small processing fee, title and recording fees, and that was it!
- Since most loan officers were employees of their institution, the company was responsible for the education and training of their employees.
Of course, there are a few changes. What might take fifteen minutes for a computer to send across country is now done instantaneously; we now have computers to retype an application when changes occur, and, the novel idea of taking a Polaroid picture of a property has now been replaced by a standard of digital pictures, internal and external, as well as the comparable sales.
There are a few things that came and went into fashion during that time, pagers gave way to cell phones, faxing gave way to emails, and, sending out information about your company is now done via social media.
One of the recent changes for a loan officer is “cross qualification”. In its purest form, this service, offered by a loan officer is designed around adding value to the listing agent’s tool box, as they struggle to provide value added service to the real estate transaction. In its most perverted form, it is a loan officer attempting to steal a deal from a hard working loan officer that has strived to serve their customer, and does not want to stand in the way of their client successfully negotiating a sale on their dream home.
Let me state, it is very important for listing agents to obtain cross qualification from loan officers that they have worked with in the past, and therefore can know and trust their expertise. With current standards, it is imperative that your seller enter into a contract that they know through an independent third party, that the transaction will close. And, it is equally important that the loan officer doing the cross qualification provide value to the transaction in helping the seller obtain the maximum sales price, as they help the seller sort through, the best price offer on the property, by giving the listing agent, quality feedback on each buyer.
Recently, I had a friend from a competing lender that was doing the cross qualification on a loan our company had originated. When we sent over the “cross qualification” documentation, she indicated to me that their company’s maximum debt ratio on an FHA loan was 50%. The buyers ratio that I was submitting for cross qualification, was at 51%. She suggested I re-run the approval on a 5/1 loan, to get the ratios under 50%, so that they could do the formal cross qualification through their company. This is two professionals, acting collegiately, to serve a mutual customer base, that is the seller (listing agent), and buyer. Whenever our company does a cross qualification, we ask for documentation and information that will allow us to verify the correct lending decision has been made by THEIR lenders standards, not just our internal standards. Still, it is important for you as the loan officer, to clarify to your agent, what the standards your company might have, as it relates to providing the financial resources to this sale.
When you do a “cross qualification” I would suggest you do the following (and if you company has requirements, suggest they work to this standard)
- Approach the transaction with the desire to help the listing agent complete a sales transaction at the highest sales price for the seller.
- Request copies of current 1003, AUS, current pay stub, and, in the case of self-employment, tax returns, from the existing borrower; or with authorization, their loan officer.
- If you have concerns, point out the potential pitfalls to the application when discussing with your listing agent.
- Work hard to develop a rapport with the buyer’s agent by offering to work with their existing loan officer.
- Always request copies of information with identifying information “blacked” out.
- Speak with the potential buyer to confirm their information, and insure that underwriting standards can be met.
- Work to develop a close rapport with the loan officer who has the buyer. At the very least, your regional manager, or recruiting officer, will appreciate that you have treated your “competition” with respect, and, you might have a friend that can help you with your buyer in the future. If you are in the business as long as me, that is very likely!
When done properly, cross qualification can be a service to the listing agent, and, help to insure that you receive your share of referrals from that agent, and that office. It can help you to add to your list of referral partners, by treating the buyer’s agent, and their lender with respect, and not “transactional” .
Integrity 1st Mortgage – President